In this and upcoming two posts, I will document our journey towards the purchase of our new family vehicle.

Resistance to replacing our old car

For two years now, since we moved to the Pacific North West region, against all the admonishment I have suffered from Mrs AVI,  I have stood-my-ground on avoiding the purchase of a new family vehicle. My resistance stems from the following thought process that I have about cars

1. To me a car is an accessory designed to take a person from place A to place B. If it was upto me I would completely eliminate car from our lives (see here). Alas, we have chosen a suburban American life-style and with 2 kids in tow, life without a car is not an option
2. I do not have a refined taste in cars (and wine). It is some what frustrating that to me $10 wine and $100 wine tastes the same. So goes for cars. In terms of pure ride quality, I simply cannot appreciate the difference in ride quality of a BMW-X3 vs. my beaten up V6- Hyundai Sonata.
3. Scratches and dents on a old beaten up car do not bother as much as would be the case with owning a new car. It goes without saying that as a consequence, insurance costs are lower.
4. Car is a depreciating asset and as a value-investor, I simply cannot get myself investing in an asset that has 100 % chance of going to zero in time.

The losing battle

To offer some background on how I finally came around to the idea for us to buy a car, 1 I want to note that we currently own two cars

1. 2006 Hyundai Sonata, with current mileage of around 140 K.
2.  2014, Toyota Prius, with current mileage of around 70 K.

Both vehicles are front-wheel drive vehicles, purchased in times when we were living in snow-free regions of the country. Back then, the furthest I ever traveled to work was 3 miles.

For almost a year now, my commute to work, to put mildly, is horrendous. It takes me about 45 minutes one-way to commute from my house to work and the only mode of transport available is a car. Even my employer acknowledges this and as an incentive for me to accept the job, they even paid me a car-purchase sign on bonus.  Mrs AVI runs her business from home and therefore on day-to-day basis has no use for car.

Prius serves as my day-to-day commuter vehicle during the week and family vehicle for weekend-jaunts. Hyundai, for most part, stays put except for times when Mrs AVI has to take kids for their weekly sporting activities.

If it was not for the following two reasons, I simply would not have budged on my desire to not purchase a new vehicle.

1. I got a first hand taste of dangers of snow driving last winter, when my car got stuck in about an inch of snow. Neither of the two vehicles we own are designed for winter weather driving.
2. Would I be willing to take a chance on accidents with kids in the car? I could be the safest driver in the world, but still some one could hit us out of no where.

The later consideration was always true. However, until two years ago, the likelihood for us driving with kids on any give day was quite low. However as kids have grown, their sporting and other extra-curricular  activities have grown and we find ourselves chauffeuring kids around pretty much on a daily basis. To top it all, the elder of AVI son’s now wants to partake winter-sport activities. Driving to ski-locations in one of our current cars would itself be an adventure ride and not worth the risk.

I simply do not have a good answer to above consideration except for acknowledging the reality that we should atleast explore options to purchase a weather-appropriate family vehicle.

Questions Questions and more Questions

The last time we were in the market for purchasing a car, we were far ahead of the game. We knew what our budget was, what car, color and trim we wanted. The only question that we needed to answer for ourselves was: Should I  buy a Used or a New Car?

This time round, we are starting with a very vague idea of what we want to purchase. All-Wheel-Drive (AWD) is considered default for driving in the weather condition of Pacific-North West. Mrs AVI has a desire for a bigger family vehicle (preferably SUV) to suit our suburban life-style.

So we are starting with the known: an AWD SUV. Not much in terms constraints to narrow down our search.

I have compiled a series of questions that we need to address in order for us to narrow down the available choices of vehicles to consider.

Today I will tackle the first and the most important question of all:

How much car can we afford?

I have seen 3 schools of thoughts on this topic

1. Based on monthly- take home income:  According to this NerdWallet article, a simple rule of thumb is: “Car buyers should spend no more than 10% of their take-home pay on a car loan payment”
2. Based on annual-gross income: Financial Samurai espouses this rule for everyone,  “Spend no more than 1/10th your gross annual income on the purchase price of a car.”
3. Based on net-worth: This was an interesting take by Financial Samurai on affordability calculation for folks who may not necessarily have fixed annual income, but instead have accumulated wealth. This simple rule of thumb states: Spend 5 % or less of your net-worth on the purchase of a new car.

So which of these seem more realistic a rule of thumb that an average individual would consider. To get some answers, lets look at the chart below,

As of July 2019, the average price of a used vehicle is around $21.8 K. Based on this number, I can safely conclude that it is very unlikely that an average-American is abiding by the 1/10th gross-income rule.

In order to better understand whether Rule 3 seems realistic, we can look to find out what is the average age of a car buyer in 2019. According to, hedgecompany.com, average car buyer age now stands at around 53. To buy a $21.8 K car, according to rule 3, an individual must have a net-worth of $436 K.   I would venture to claim that net-worth of about half a million dollars by age 50, seems quite feasible to me.

Finally, if an individual decides to take a loan, assuming an average car loan rate of 4 % (for individuals with excellent credit score), monthly payment for a loan of $22 K is around $400, which is  much lower than the $755 rule of thumb.

Based on this analysis, it seems to me that most folks who think of car affordability tend to abide to the first rule of thumb, less so the third rule and rarely if at all, the second rule of thumb.

For us, the net-worth rule makes the most sense. For starters, we hate debt. We will not purchase a car if we cannot afford to pay in cash for the purchase. Rule 1 therefore is out of question. Rule 2 seems a bit fickle to me. Annual incomes for the business that I am in can change quite a bit from year to year. Making a long-term purchase decision based on annual income just does not seem right to me.

The 5 % of net-worth rule offers us sufficient wiggle room to either consider purchasing a brand-new economy family SUV or if we decide to extend our budget a bit, we could even consider an almost new-base class luxury SUV.

In the next post I will address the following questions

1. economy SUV vs. luxury SUV?
2. New vs. Used? and
3. Purchase cash vs. financing vs. leasing?

And as usual, I will end this post with the following:

Video/Book/Article/Audio for the Week

The highlight for this week is, NPR-planet money podcast on: Interest Rates, why so negative? Highly, highly recommended to get a laymen’s perspective on world of negative interest rates, almost surreal economic reality that the world is facing today.. and the end may not be pretty.